Three Keys to Unlocking Microinsurance’s Potential: The sector is growing – here’s how it can grow faster
Although microinsurance has grown in the shadow of flagship microfinance products like microcredit, it has slowly established itself as a dominant figure in inclusive finance. Its renown has reached both practitioners and researchers, both of whom increasingly acknowledge its positive impact on the reduction of low-income households’ vulnerability, as we were reminded once more at the recent 10th International Microinsurance Conference in Mexico. And this ascension echoes the impressive growth rates the sector has managed over the past five years.
Yet microinsurance is still far from achieving its full potential. Except for a handful of countries, the coverage ratios (i.e., number of people covered/total population) are dramatically low (below 10 percent). A number of challenges limit its development, such as risk perception, lack of trust and, of course, limited cash-flows, which remains the core barrier to demand. As for supply, challenges mainly relate to cost-effectiveness, uptake and distribution.
At MicroSave (where I work as Assistant Manager in Inclusive Finance and Banking), we support microinsurance providers in tackling these challenges. From our experience, we know that there is no “one size fits all” solution. However, we have come across practices that we believe can become key drivers to unlock the potential of microinsurance.
1. Investing in mobile insurance
Mobile technology is experiencing an astonishing boom in developing markets. The range of services that the poor can access through their phone is impressive. Whether it is farmers accessing local market prices for their produce or doctors using telemedicine to provide care in rural areas, mobile technologies are transforming lives.
For microinsurance, as well, mobile technologies bring many promises – for providers and intermediaries as well as end users. They drastically reduce distribution and operations costs for insurers, which in turn may reduce premiums for customers. These models also serve as a valuable information platform: Insurers may have access to customers’ usage data to design suitable and customer-centric products; reciprocally, some schemes provide customers with real-time information, like weather/rainfall forecasts in the case of agriculture insurance. Other schemes can offer preventive health recommendations to help keep families safe from diseases.
Though developments in mobile insurance are impressive, they are predominantly focused on the MNO-led model and loyalty insurance, in which MNOs pay the premium of clients having a certain ARPU (average revenue per user). Though the “freemium” model (in which clients can pay for additional coverage that goes beyond what the MNO pays for) and other voluntary/paid experiments are under way, many other potential models (involving banks, agent networks, etc.) are not developed to full potential. Also, the alignment of values, objectives and interest between the different partners (MNO, insurer, broker, etc.) is often not clearly defined, resulting in the early failure of some of these schemes. Adequate design for the value alignment of stakeholders and analysis of the impact of the mobile insurance initiatives seems to be the next agenda for the sector.
2. Leveraging behavioural research to unleash microinsurance uptake
At MicroSave, we strongly believe that behavioural research is another fundamental key the sector should focus on to unleash microinsurance uptake, with a potential to both leverage demand and boost supply-side innovations.
As noted before, the sector is developing rapidly, but not always in the customers’ best interest. Here, reasoning in terms of behavioural analysis can help bring real change. By trying to identify psychologies that are at play when doing (or not doing) an action, behavioural research provides a tangible insight into the customers’ perspective, experience and rationale. The approach consists of examining what drives customers’ decision-making journey, taking into account internal reasoning, deliberate choices and actions, the surrounding environment and social norms.
For example, we recently conducted in Uttar Pradesh. Using a behavioural approach, we identified a series of hassles and biases that prevented these workers from buying (or even considering) insurance as a risk coping mechanism. For instance – as is often the case with the poor – we discerned that informal workers were “present-biased,” i.e., too preoccupied with their day-to-day expenditures to plan for future needs. For this specific issue, finding ways to make the future more salient in their mind could help leverage demand and usage of insurance.
Only such a user-centric design approach can unleash the full potential of consumers’ demand, by revealing hassle-free pathways that would push customers towards “the desired behaviour,” i.e., insurance purchase and usage. Reciprocally, this might unlock the readiness of suppliers to innovate in microinsurance, providing the right set of behavioural triggers to use for product and process design.
3. Capitalising on governments’ social microinsurance efforts
While conducting a landscape study on microinsurance in Asia, we were impressed by the outreach of what we call “social microinsurance” or Public-Private-Partnerships (PPPs) in microinsurance. For instance, in 2013, 1.7 billion people in Asia alone were covered under social microinsurance (versus 170.4 million for traditional microinsurance). These schemes differ from traditional social security programmes as they involve insurance mechanisms (risk underwritten and carried by commercial insurance companies). But they cannot be considered pure microinsurance products as the government pays the full or a major part of the premium.
Putting this “midway” solution at the centre of the table has generated lots of debates and perplexity, since for most experts, subsidised schemes cannot be a long-term solution to reach microinsurance goals. But we can’t deny the scale and progress the subsidised schemes bring to the sector.
Earlier this year, we collaborated with the Society for Elimination of rural Poverty (SERP), a support structure established by the Government of Andhra Pradesh (India). The value proposition they offer to poor communities is unprecedentedly huge. Naturally, as a social microinsurance programme, all the schemes are fully or partially subsidised. But in addition, SERP has implemented a few measures that give “client value” its real meaning. For instance, they have put in place an “Immediate Death Relief Fund” which provides bereaved families with a cash advance on the sum which is assured immediately after the death of the insured, so they can pay for the funerals. These families also have access to the “Insurance Plus” programme, which provides financial and psychological counselling, ranging from career coaching for adolescents to administrative help to claim widow pensions or scholarships. These kinds of PPPs are a good compromise to reach scale and provide social impact. Most importantly, because these schemes are not governed by the usual cost-effectiveness issue, they are a fertile ground for innovations; insurers should learn from them and convert government efforts into commercially viable propositions.
Although these three activities seem to have the potential to bring the sector to the next level, let’s not forget that they will only bring substantial change when combined with the decade-old efforts to build sustainable and healthy markets, such as increasing insurance awareness, building conducive regulatory environments, etc. And, as we were reminded during the 10th IMC last month, the sector as a whole will have to keep, in all its endeavours, a client-oriented approach to make a difference in the long term.